How has the credit crunch altered the way clients are deciding upon and conducting their financing requirements?


Alex Chambers
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Jim Esposito, head of syndicate and debt financing at Goldman Sachs
Funding decisions are more important than ever before. Discussions with borrowing clients have become much more strategic in nature and are taking place at much higher levels of an organization. Borrowers are looking for sound advice and a safe pair of hands. Funding decisions and execution tactics are anything but cookie-cutter. The difference between success and failure is much greater than a year ago.

Jean-François Mazaud, deputy head of capital raising and financing at SG
Since June 2007, we have observed three different phases:

From July to December 2007: what I would call the denial phase. After the initial shock of the summer crisis, issuers were either believing that the crisis would be subdued or that it would not have any material impact on their balance sheets.

From Jan 2008 to March 2008: the dark phase. All market participants quickly understood during January that what many had hoped for (just a liquidity crisis) was turning into a major financial crisis with systemic risks embedded. The peak was reached with the collapse of Bear Sterns. Major indicators showed the dislocation of debt capital markets: historically high gap between cash and CDS indices, or between three-month Eonia and overnight rates, historically low primary bond volumes, fall of new loan volumes, closure of capital markets segments (ABS, high-yield, short-dated FRNs, long-dated senior bonds)

From March 2008 to date: the hope phase. Bear Sterns did collapse but was also rescued at very short notice. Central banks implemented massive incentive plans to absorb the financial shock, and banks announced large capital increases, cut dividends, increased their write-downs, their provisionings, and started to scale down their loss-making operations. This translated into a fall of spreads, mainly for financials (spreads had peaked at 20x their June CDS levels in March 2008 and are back to 7x today) and into an increase of primary volumes (Q1 2008 corporate volumes in euro had been of €22 billion, of which €9 billion was for GE alone, whereas April saw a total volume of issuance of €17 billion)

Siddharth Prasad, head of EMEA FIG capital markets and financing at Merrill Lynch
CEOs and CFOs are focusing proactively on liquidity and balance sheet management. Liquidity is key: issuers take what is on offer rather than wait for a better tone to return. Issuers have been accepting the new issue spreads. Issuers are being more strategic on funding and diversifying away from traditional markets. Deleveraging of balance sheets. Banks are being forced to reduce their lending, which forces banks to completely remodel their previous assumptions (particularly true for GCC). Significant amount of balance sheet repair undertaken by financial institutions in the form of dilutive and non-dilutive capital raising

Chris Tuffey, head of EEMEA debt capital markets at Credit Suisse 
Execution risk is now much more important to them than 12 months ago; certainty of the deal getting done successfully is key.

Philippe Dufournier, co-head of global financing, Europe, at Lehman Brothers
The discussion has elevated. Decisions are being made at a higher level, at times the highest level... moving from treasury function to CFO and CEO offices – certainly for financial institutions, probably a little less so for corporates.

At the height of the crisis the banks that managed to win mandates are those that leveraged key relations at the top level to promote and discuss the funding agenda.

For borrowers it was a matter of strategic performance: How am I going to fund my assets in a world where traditional funding mechanisms have disappeared?

The reason why CEOs and CFOs have taken greater interest is partly because of the higher execution risk surrounding transactions and because of the increased significance of the signal sent to the market when a company accesses public funding. Do I need to be in the market to show that I need funding or do I want to be on the sidelines and show that I don’t need funding? And linked to that: am I prepared to print at 300 basis points over when I’m used to 30 or 40 – what does that mean for me as an institution going forward? All these considerations have taken on greater importance.

Miles Millard, European head of debt capital markets, Deutsche Bank
As liquidity has returned to the bond markets, clients are looking to reduce their dependence on the short-term markets and are reassessing their mix of bank and bond debt as bank lending becomes more constrained.

Roberto Isolani, joint head of global capital markets at UBS
Funding is now a strategic resource and CEOs and CFOs are now involved in funding strategy. The treasurer is now a key post, with lots of organizations looking to upgrade.

Issuers are no longer holding bankers’ feet to the fire on pricing. They understand that deals have to be pre-sounded with investors and that they need to accept the pricing terms given.

Those issuers that can accept the pricing demanded by investors are over-issuing rather than under-funding; where possible they are going for volume, so that they have a cushion should market conditions worsen or their need for funding increase if recession hits their business

Issuers who can’t issue at current pricing are being squeezed. This group has to be far more inventive/ingenious to survive. Issuers are more receptive to structured funding ideas. This allows them to raise funds discreetly and not reveal to the market at large how much they are willing to pay to get money in the door.

Martin Egan, head of primary and global head of debt capital markets at BNP Paribas
Markets have become tiered, with SSA and corporate issuers generally having good access to markets albeit with notable new issue premiums, especially for the latter. Investment grade financials have faced many difficulties with normal issuing avenues partially or completely closed, eg covered bonds, subordinated financings and securitization. Rating has become more important, with AA credits popular while single-A and below credits remain problematic. High-yield issuers have also faced major problems, with European markets still awaiting the first deal of 2008. This dramatic change in market conditions has pushed many issuers to scan global markets for any and all forms of liquidity, whether bond, loan, structuring lending or private placement. Issuers with large funding requirements are front-loading supply into the first half of the year, while counterparty risk – both issuer to underwriter and vice versa – has become even more important.

In strong markets, issuers had very limited risk in awarding mandates to second-tier banks. This crisis has reminded all that underwriters need to be well rated, experts in their field, prepared to provide liquidity, have strong distribution capabilities, plus derivative expertise. It is about depth of infrastructure.

Stephen Jones, head of European financing solutions group at Barclays Capital
Prioritizing their liquidity positions through both the bank, debt and equity capital markets. Issuers were quick to adjust to the new pricing levels, and issuance volumes reached record levels as a result.

Financial institutions focused on repairing damaged balance sheets, accessing capital via wealth funds, hybrid markets and via rights issues.

The liquidity crunch also impacted sovereigns and public sector borrowers, with banks unable or unwilling to underwrite auctions at previous levels given balance sheet constraints.

Borrowers increasingly need to focus on an expanding range of products and markets: sukuk, Schuldschein, emerging currencies, convertibles, structured products (eg indices linked and reset notes) have been utilized. Borrowers need to assess a broader range of sources of capital than just plain vanilla.

Parallel documentation across different markets – with issuers establishing Euro medium-term note (EMTN) and US shelf/Rule-144A platforms to enable them to react opportunistically to the constantly changing market environment.

More reliance in the bank markets, with issuers drawing down on previously unutilized revolving credit facilities/backstop lines to gain liquidity.

The bridge to capital markets issuance is a common method for companies achieving funding certainty. Bridge loans increasingly include exploding margins to incentivize early refinancing via the capital markets. Many bridges are not acquisition related, simply methods of guaranteeing liquidity.